Billionaires Are Investing in AI Stocks with Recent Stock Splits Ahead of 2025

Investors are increasingly drawn to stock splits for two main reasons: they make shares more affordable by lowering the stock price, and they can signal high-quality companies. Typically, a forward stock split is seen after a significant rise in stock price, a scenario that does not usually apply to underperforming companies.

Recently, several renowned hedge fund billionaires have shown interest in two notable stocks, Broadcom (AVGO -2.55%) and Arista Networks (ANET -1.40%). Both firms have recently executed stock splits.

• Chase Coleman, from Tiger Global Management, acquired 1.6 million shares of Broadcom, boosting his investment by 912%. Broadcom is now among his top 20 stock holdings.
• Stanley Druckenmiller of Duquesne Family Office bought 239,980 shares of Broadcom, marking the start of a new investment position. Broadcom is now part of his top 15 holdings.
• Steven Cohen at Point72 Asset Management purchased 211,823 shares of Arista, increasing his position by 32%. Arista is now one of his top 3 holdings, excluding options.

Other affluent fund managers have also invested in Broadcom and Arista in the third quarter, though their stakes are smaller compared to those mentioned above. Ken Griffin of Citadel Advisors, along with Israel Englander of Millennium Management, have made purchases in both companies.

Before investing in any stock, it is essential to understand the underlying business. Let’s explore more about Broadcom and Arista Networks.

1. Broadcom

Broadcom focuses on semiconductors and infrastructure software. Its products include chips used in Ethernet switches, routers, data center storage systems, and mobile devices. The company's software solutions tackle cybersecurity, mainframe observability, and virtualization in data centers.

Broadcom enjoys a dominant position in several semiconductor markets, holding an 80% market share in networking equipment, with projected spending on Ethernet chips expected to grow by 20% to 30% annually in the upcoming years, as per JPMorgan Chase.

Additionally, Broadcom leads in high-end application-specific integrated circuits (ASICs), which are custom-designed chips tailored for specific applications like artificial intelligence (AI). It holds a 60% market share, with spending on AI accelerators (including both custom chips and graphics processing units) anticipated to grow by 29% annually until 2030, according to Grand View Research.

Recently, Broadcom announced solid financial results for fiscal Q4 of 2024, concluding in November. The company’s revenue surged by 51% to $14 billion, while non-GAAP earnings rose by 28% to $1.42 per diluted share. Nonetheless, organic revenue climbed merely 11%, with the acquisition of virtualization expert VMware contributing 40 percentage points to overall growth.

However, crucial remarks from CEO Hock Tan during the earnings call caused the stock price to rise significantly. He revealed that the company currently designs custom AI accelerators for three major tech firms, reportedly including Google parent Alphabet, Meta Platforms, and ByteDance, the parent company of TikTok. Tan suggested that revenue from these clients could grow at least fivefold over the next three years.

Moreover, Broadcom is collaborating with two other large tech companies, believed to be Apple and OpenAI, which may begin generating revenue by 2027. This means that revenue from their custom AI chips could multiply significantly more than fivefold in the next three years, suggesting impressive market-share gains for Broadcom.

Looking forward, Wall Street projects that Broadcom's adjusted earnings could rise by 22% annually through fiscal 2027. Consequently, the current valuation of 49 times adjusted earnings may be seen as reasonable. Long-term investors might find it worthwhile to consider starting a position now.

2. Arista Networks

Arista is a leader in high-speed networking solutions. The company offers Ethernet switching and routing platforms that facilitate data movement within enterprise and cloud data centers, complementing its hardware with software solutions for network monitoring, automation, and security. Morgan Stanley recognizes Arista as well-positioned to capitalize on the growing demand for AI-related networking.

Arista has transformed the market in two significant ways. Its core product innovation is the Extensible Operating System (EOS), which provides a unified software platform across its entire hardware line. This integrated approach sets Arista apart from older vendors like Cisco Systems, who use different operating systems for different products, complicating network monitoring.

Furthermore, Arista exclusively uses third-party semiconductors. By sourcing chips from suppliers like Broadcom, Arista can develop networking products with the latest technologies without incurring heavy costs associated with semiconductor design. This strategy allows Arista to focus on its strengths in software development while granting customers the flexibility to choose the chips used in their networking devices.

In its recent Q3 results, Arista reported a 20% increase in revenue, reaching $1.8 billion, and a 31% rise in non-GAAP earnings, bringing them to $0.60 per diluted share. Management has also updated its forecasts, now anticipating revenue to grow by 22% in Q4 and projecting a 16% growth rate for 2025.

Critically, Arista leads the market in high-speed Ethernet switching platforms capable of processing speeds of 100 gigabits and above. The demand for high-speed networking equipment is expected to rise as more companies invest in AI technology, positioning Arista to benefit from this trend.

Wall Street estimates that Arista's adjusted earnings will grow at a rate of 16% annually through 2027. While this may make the current valuation of 52 times earnings appear pricey, investors may still want to consider initiating a small position today. Notably, Arista's earnings have consistently surpassed consensus estimates for 12 quarters in a row.

JPMorgan Chase is an advertising partner of various financial platforms. The Motley Fool, which has stakes in multiple companies including Broadcom, has disclosed its investment policies.

Billionaires, Investments, Stocks, Arista, Broadcom, AI